Merger and acquisition activity in India surged in 2016 with total announced deal value rising 83% to $44.1 billion from $24 billion last year. The Indian M&A market accounted for 12.1% of total Asia-Pacific market, which indicates strong investor optimism in the Indian markets.
The success of a M&A deal depends on the strategic benefits that the acquisition brings to the buyer. These benefits depend on the strategic fit the buyer has with the acquired business. These benefits could be in the form of increased turnover, reduction in costs, access to customers, products, technology, goodwill, geographical reach and could even be eliminating competition. All these result in increased profitability and improved market share for the buyer. If all the benefits that accrue to a buyer exceed the cost of acquisition, then the transaction is considered successful and accretive to earnings per share.
In our experience, four large themes played on the strategic M&A front to create value.
- Consolidation to increase the market share – As the industry matures, capacity increases and top players look for consolidation to retain the market share. Take, for example, the cement sector. Analysts estimate the size of the cement industry in India to be in the range of 410-420 million tonnes. No wonder this sector witnessed one of the largest consolidation deals this year involving Rs 16,300 crore acquisition of Jaypee Cement by UltraTech. It was largely driven by the strategic benefits of consolidation and increased market share to UltraTech in the absence of any other similar capacity available for acquisition.
- Accelerate market access for the buyer: Often, relatively small companies with innovative products have difficulty reaching the entire potential market for their products. Take, for example, Vodafone's acquisition of YOU Broadband. YOU Broadband has more than 3,000 km of optic fibre cable and 6,000 km of last mile co-axial cable network and about 5 lakh subscribers.
The Mumbai-based company is a category A Internet service provider and offers high-speed Internet and voice services to home users, small businesses and corporate customers across 12 cities, including Hyderabad, Bengaluru, Chennai, Pune and Surat. It is among the top five wired broadband service providers in India. The acquisition will provide strategic benefits to Vodafone, accelerate its entry into a new business and help it become a dominant player in the segment.
- Accessing new markets: An overseas buyer may use an acquisition to facilitate its entry into a new geography as it cuts down the time and hassles of setting up a greenfield venture. The booming healthcare sector is abuzz with several top global funds, apart from healthcare providers, on a shopping spree. The sector saw the mother of all the deals when Malaysia's IHH Healthcare bought a 74% stake in Ravindranath GE Medical Associates through its Parkway brand for Rs 2,150 crore. Ravindranath Associates runs the super-specialty and multi-organ transplant chain Global Hospitals. IHH expects the acquisition to facilitate its entry in the Indian healthcare market.
Another of our recently advised transaction is where Fuji Electric from Japan acquired Indian electrical company Gemco Controls to get an access to a well-established domestic distribution network that can be used for selling their global products in India. Similarly, b4S Solutions’ acquisition of Swaraj Automotives provided them an entry opportunity in the manufacturing space, as they were primarily a services oriented group until then. Mahindra group was the seller.
- Complementary acquisition to reduce internal risks -A company with a single product with high margins may boast a more reduced risk profile if a company with a broader range of products is introduced through an acquisition. The acquisition of Escorts’ auto parts business by Badve Engineering will give them an entry into a new complementary business line with ready access to a new set of customers. This will augment their capabilities in the new line of business.
One of the key roles of advisors is to highlight the strategic benefits to the buyer and ensure that they have been captured in the valuations. Since every buyer expects to reap a different set of benefits from the asset it offers a different bid price for the asset. The highest bidder is the one that sees the maximum strategic benefit from the acquisition.
Ashwani Khare is executive vice president, ICICI Securities Ltd.
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